Professional Documents
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Introduction
1.1
The US toy and game industry is huge and totaled 42 billion in 2008 with
projected growth of 4.6% per year . 52% of this industry is Toys and Games of
which 14.1% is from the doll industry , which we are covering below . See the
illustration in Fig 1.1
Fig 1.1
match my Doll clothing McAdams belived the project had moderate risk
.
Fig 2.2
Match my doll clothing extension outlays -
2.2
The method
The method that Emeline will adopt in keeping with the budgeting
comittees requirements, will be based on analysing the investment,
operationg profit but more importantly will be based on the discounting
cash flow (DCF) which will help us to detemine the Net Present Value
(NPV) of the proposal.
3. The Analysis :
The company needs evaluate productions runs ad volumes, manufacturing
costcomplications, development and technology cost , sensitivity on the
selling price of the completed good and the breakeven production
volumes.
3.1
The initial investmentWhen comparing the initial investment between the 2 proposals we
find the DYD has a much hihgher total cost $ 2291 $(000) than MMD .
See Fig 3.1
Fig 3.1
All this tells us that is that if
the company was using cost
as an appraisal process than
MMD, would be excepted
over DYD. However we need
to look at the returns of the
operating profit to see if the
company
is
generating
returns or losses or if
operating at breakeven point
and analyse to see if this
ongoing or will generated
profit through forecasting
beyond the breakeven point.
3.2
DCF and
Sensitivity
Analysis : ( taken
from 2010 to 2020)
When
making
an
analysis Emeline and
the
Budgeting
committee will consider the cash management through capital rationing
on whichever project the except . They will aslo look at the NPV
implementation to refelct the time value of the money invested in each of
the projects and in addition this will be further analysed through the IRR of
both the proposals that have been put forward.
Rate
Low
7.7%
Medium
8.4%
High
9.0%
NPV
9304.5
7
7782.
97
6724.7
2
Payback
Period
5.85
5.85
5.85
IRR
27.56
%
26.63
%
25.94
%
To get the NPV, I have taken the cash flow after Terminal Value and a
applied the DCF rate at medium risk.
Because we have applied the DCF rate of 8.4% we can see through the
analysis that the NPV rate is $7782.97 . The NPV is positive so this project
is feasable. The IRR= 26.63%
Design Your Doll : is a long term project and has high risk as we have
discussed above, so the DCF will be 9.0% which will be applied to get the
NPV. See the table below - Fig 3.2.2 ( for details of the analysis please
refer to Appendix 1.2)
Similar to above, to get the NPV, I have taken the cash flow after
Terminal Value and a applied the DCF rate at medium risk.
Fig 3.2.2
Risk level
Rate
Low
7.7%
Medium
8.4%
NPV
12,356.
35
9,893.
93
Payback
Period
8.49
8.49
IRR
21.69
%
20.66
%
High
9.0%
8,187
.48
8.49
19.89
%
Because we have applied the DCF rate of 9.0% we can see through the
analysis that the NPV rate is $8187.48 . The NPV is positive so this project
is feasable. The IRR= 19.88%
We can see based on the analysis that both projects are have are feasible
however Design your Doll has the higher Net Present value than the Match
My Doll Clothing. However MMD has a higher IRR than DYD and its also has
a shorter payback period.
3.3
Operating Analysis :
We look into the proposal and the finanacial accounting further. We have
seen earlier that DYD has a higher initial investment that MMD (fig 2,1),
however it has a much higher operating profit than MMD. See Fig 3.3.1
( for details of the analysis please refer to Appendix 1.1 & 1.2)
Fig 3.3.1
We then look into Free cash flow and we find once again that DYD has a
higher FCF than MYD. See Fig 3.3.2 1 ( for details of the analysis please
refer to Appendix 1.1 & 1.2)
Fig-3.3.2
Free cash flow is most often defined as operating cash flow minus capital
expenditures, which, in analytical terms, are considered to be an essential
outflow of funds to maintain a company's competitiveness and efficiency
The"free" cash flow, which becomes available to a company to use for
expansion, acquisitions, and/or financial stability to weather difficult
market conditions. The higher the percentage of free cash flow embedded
in a company's operating cash flow, the greater the financial strength of
the company. Investopedia.com(2015) . Both companies provide a good
investment oppurtunity.
3.4
Fig 3.4.1
The Net working capital is the aggregate amount of all current assets and
current liabilities that is being used here to measure the short-term
liquidity of both projects, and can also be used to obtain a general
impression of the ability of company management to utilize assets in an
efficient manner.
In this case both DYD and MMD have net working capital figures that are
substantially positive, it indicates that the amount of short-term funds
available from current assets are more than adequate to pay for current
liabilities as they come due for payment. So conclusively both projects are
feasible and would be acceptable to Emeline and the committee.
is critical as it
determines the minimem rate of return that will be deliverded by the project
without looking at the DCF and is a key method in determining if the project is
acceptable.
The company will also be looking for the highest operating rate of returns with
the shortest payback period of the cost of capital, for the project to be accepted.
From the analysis, Match My Doll Clothing line has the higher IRR than the Design
Your Own Doll line and much shorter pay back period.
Both Projects are mutually exclusive from each other, are cash flow realted and
they compete with each other.
So we can conclude that ,both projects are a good investment and the NPV of
both proposals are not significantly different. DYD has a higher NPV, however
MMD, has a higher IRR, profitability index and a shorter payback period and this
would make it more attarctive to the budgeting committee so I would
reccommned this to Emeline Harris as the more favourable option .This is
supported by all my analysis above.
References :